Abstract

This thesis focuses on the political economy of industrial policy as defined by Laffont (2000). In particular we study the effects of political economy constraints on industry design. Our motivation relies on the results of more than 20 years of regulatory reforms, where industries have been reorganised after their initial privatisation and/or restructure. So far, the literature has extensively studied the relationship between political economy and regulation (Levy &; Spiller (1997); Henisz & Benet (2003)). However, the study of the relationship between political economy and industry structure has received less attention. This has happened despite the fact that, as noted by Dana (1993), industry structure and regulation are jointly determined. Our work contributes to the study of the effects of political economy constraints on industry design. At a theoretical level we build on Auriol & Laffont (1992)'s model of regulation by duopoly and on Dana (1993)'s model of regulating multiproduct natural monopolies. We introduce delegation to their problem and we allow for regulatory capture. In the first case we found that under some circumstances capture biases Congress' decision towards a more competitive structure (duopoly) as the optimal response. In the second case, we find that if preventing capture is too costly, industry design favours horizontal separation of the natural monopolies as the optimal response. At an empirical level, we analyse the political economy constraints that led the Mexican government to reform its natural gas industry while keeping natural gas production as a legal monopoly and organising the industry with a dominant integrated incumbent (transmission and retail). This chapter contributes to our research by opening the "black box" of the determinants of industry design a little more. It also contributes to the literature that has studied Mexican natural gas reform. This literature has concentrated its attention on the study of regulatory incentives, taking industry structure as given.